Economics: intro •Economic questions arise bc we want more than we can get. •Inability to satisfy want: scarcity •Incentives: rewards that encourage action or penalties that discourage action. •Economics studies the allocation of scarce recourses among people •Alfred marshell (1842-1924) shaped macro economics •Joan robinson: “ the main reason to study econ is to avoid being fooled by it Two main parts: A) Microeconomics: studying the choice of individual decision makers.
And how they interact in markets B) macroeconomics: how the overall economy performs. 2 big questions 1.
What, how and for whom do goods and services get produced? 2. When do choices made in self interest align with the social interest? Answer 1) •what: goods and services are objects that people value and are produced to satisfy human wants •how: factors of production. A) Land: natural recourses. B) labour: work time & effort. “quality of labour” (human capital). C) capital: tools, equipment, machines, computers, buildings.. D) entrepreneurship: human resource hat organizes the above. •For whom: who gets good: services depends on the incomes people earn. oLand=rent oLabour=wages oCapital=interest oEntrepreneurship=profit
Answer 2) •We make choices in self interest oChoices you think are best for you •Choices that are best for society are said to be in the “social interest” oUses resources efficiently oDistributes goods “fairly” When does self-interest align with social interest? (important) •Environmental issues •Bad corporate responsibility The “Economic” way of thinking Choice under scarcity => trade offs Opportunity cost: the highest valued alternative that you give up to get something. Choices at the “margin” •We look at the tradeoffs “at the margin” Marginal benefit (MB): benefit from an incremental increase in an activity.
Marginal cost (MC): opportunity cost from an incremental increase in an activity. People respond to incentives MB>MC=> do more of an activity MB does less of an activity Lesson 2 Recap: •Economics oMicro oMacro •2 big question owhat, how, for whom oself interest vs social interest •opportunity cost otrade-offs •thinking at the “margin” Lesson 2 Water vs. diamonds Water: essential but almost costless Diamonds: not essential but very costly What is value? What gives things value? Labour theory of value: the value of a commodity is proportional to the amount of labour that goes into it. Abandoned: ex. Cement lifejacket
Economists think about value differently: 1. the value of something is what you’re willing to give up to get it. 2. Economists think about marginal value instead of total value. Water is plentiful= marginal value low Diamonds are scarce= marginal value high Positive and normative statements Positive: statements of facts about observable data Normative: statements about what ought to be. Value judgments Ex. 20% of teens smoke… Positive: •Are you more likely to smoke if your parents do? •Does living location affect likelihood of smoking? •Are smoking rates different across education levels? •Self reported reasons for smoking Do prices affect smoking rates? Normative: •Kids shouldn’t smoke Cause and effect: Just because two things happen together doesn’t mean that one causes the other. Ex: ice cream sales & deaths by drowning •Both related to temperature Economists try to unscramble cause and effect by building models. Model: a purposeful simplification of the real world. Ex: paper airplane Simplification. Learn about: aerodynamics, wind structure… Cant learn about: thrust, fuel capacity, engines… Maps are models: Subway map •Lines •Stops Doesn’t show curves or turns Road map •Street names •Turns/curves Satellite photo •Adds detail
Graphs: Reveal relationships between variables 3 main types: 1. Time series 2. Cross sectional 3. Scatter plots Lesson 3 Recap: water/diamonds… Value: what you’re willing to give up to get something •Positive vs normative •Cause & effect oModels •Graphs in economics The Economic problem •Production possibilities frontier (ppf) Model: focus on tradeoffs between 2 goods. (holding other goods constant) PPF shows boundary between what we can produce and what is unattainable Building a PPF: First good: “numbers” Ex. X + 3=7 Second good: “words” Our PPF for X’s & words EX. In textbook PFF’s show marginal cost. opportunity cost of producing one more unit” Preferences& marginal benefit •your “likes” and dislikes marginal benefit: what your willing to give up to get an additional unit of something what does MB look like? Principle: the more you have of a good, the less you’re willing to pay for an additional unit. Allocative efficiency: $ up the left side of graph, pizza across the bottom. MC is a positive incline, MB is a negative decline at pt Awe have allocative efficiency. We cant produce more of any one godd without giving up some other good that we value more highly lesson 4 recap: •allocative efficiency (MB=MC)
Economic growth isn’t free 2 key factors •Technological change oresearch and development •Capital accumulation oDevote resources to production of capital Both require resources that could be used for current consumption •Economic growth doesn’t eliminate scarcity •Opportunity cost of growth is reduced current consumption Consuming outside your PPF. •Gains from trade Imagine if you produced everything you consume…(“Autarky”) Producing one (or a few) goods and trading with others is called “specialization” Gains from specialization come from exploiting “comparative advantage” Absolute Advantage: More productive at something
Comparative Advantage: Producing at a lower opportunity cost Ex: textbook smoothie bar example… On lined paper Liz: absolute advantage in smoothies. And comparative advantage in smoothies Joe: no absolute advantage but comparative advantage in salads Where does Comparative advantage come from? •Over time people or countries can develop comparative advantage through repeated production. “learning by doing” (dynamic Comparative advantage) Economic Coordination? •Who organizes all this? Centrally planned economy: USSR, china… Decentralized market system: most countries Decentralized markets rely on 4 institutions…ON MIDTERM . Firms: hire and organize factors of production 2. Markets: any arrangement that connects buyers and sellers 3. Property Rights: social arrangements that govern ownership and use 4. Money: any commodity or token that is generally accepted as a means of payment Markets coordinate economic activity through price adjustments. Lesson 5 Demand and supply In a market system, economic coordination happens through price adjustment Competitive markets: many buyers and many sellers •Prices determine the rate at which goods can be exchanged Money Price: number of dollars Relative price: $price of one good relative to another
Ex: coffee:$2, gum$1 (Money), one coffee costs 2 gums Demand: different than “want” •To demand something you must: a. Want it b. Be able to afford it c. Plan to buy it Law of demand: holding everything else equal, the higher the price of the good the lower the quantity demanded 2 effects cause this: a. Income effect: when price increases, your money doesn’t buy as much b. Substitution effect: when a price increases people substitute to purchasing other goods Ways of representing demand: a. Demand schedule b. Demand curve: When the price of this good changes we move along the demand curve
Changes in Demand: when things other than the price of the good change, the demand curve shifts. Things that shift demand: •Nature •Quality •Tastes/preferences •Income •Price of other goods oComplements: consume these goods together (Ex. Shoes, always need both) oSubstitutes: consume one or the other •Expected future prices •Population Supply: a firm supplies a good if it… a. Has the resources and technology to produce it b. Can profit from producing it c. Plans to produce and sell it Law of supply: holding everything else equal, the higher the price of a good, the more is supplied The supply curve:
IN binder Example Changes in Supply: •Input prices •Prices of related goods produced •Expected future prices •Number of suppliers •Technology •nature Lesson 6 Market Equilibrium Equilibrium: a state where opposing forces balance each other •consists of a market price and quantity Changes in equilibrium (pg 74) 1. French fry demand 2. Market for cocaine 3. Market for kitchen sinks 4. Market for barrels of crude oil 5. Market for fresh orange juice Midterm exam review •20 multiple choice •2 short answers •Multiple choice worth 2points •Short answers worth 10 •Exam worth 60 •Chapters 1-3 Ch 1 •What is microeconomics Scarcity and tradeoffs •What is value •2 big questions owhat how and for whom oself interest vs. social interest •positive vs normative statements •graphs in econ Ch 2 •ppf and opportunity cost •marginal benefit and marginal cost •allocative efficiency •growth •specialization and trade •absolute and comparative advantage •economic coordination Ch3 •demand curve (law of demand) •movement along vs shifts of the demand curve •factors that shift the demand curve •supply curve (law of supply) •movement along vs shifts of the supply curve •factors that shift the supply curve •equilibrium pg 74, 75 changes in equilibrium Lesson 7 October 11, 2011 Modeling demand 1. Demand schedule (table) 2. Demand curve (picture) 3. Demand equation Ex: in notebook In general: P=a-bQ. (a and b are some numbers) A: vertical intercept B: absolute value of slope Modeling supply* 1. G 2. G 3. Modeling equilibrium •At equilibrium price (P) quantity demanded equals quantity supplied Equilibrium quantity Q Ex: finding equilibrium Demand: p=800-2Q Supply: P=200+Q •Make the right hand side of each equation equal 800-2Q=200+Q 600=3Q 200=Q Elasticity (Ch 4) Law of demand: when price increases quantity demanded falls This gives us direction Elasticity measures how much demand changes Ex: Good X •Price increases by 1$ •Demand drops by 100 unts Good Y •Price increases 200$ •Demand drops by 1000 units Cant compare the 2! In order to compare goods we need a measure of responsiveness Price of elasticity demand= % change in quantity demanded over % change in price Ex: ticket price 21$- 9tickets/hr 19$-11 tickets/hr Find elasticity of demand 1. % change in quantity =change in Q =2/(over) 10 (from 9 to 11) over Average Q Fuck it. In notebook What does elasticity number mean? In notebook Lesson 8
Elasticity of demand = % change in quantity demanded/ over % change in price If elasticity is 1 elastic Tuesday October 18, 2011 What affects elasticity? 1. Closeness of substitutes 2. Proportion of income spent on a good 3. Time since price change Other Elasticities 1. Cross elasticity = %change in demand for x % change of price of good Y if X & Y are: Substitutes: positive Complements: negative 2. Income elasticity = %change in demand %change in income bigger than 1: income elastic. As income increases demand increases a lot Between 0 &1: income inelastic. Income increases, demand increases by a little
Negative: inferior good. Income increases, demand decreases Elasticity of Supply = % Change in quantity supplied % Change in price What affects supply elasticity? 1. Resources substitutions possibilities 2. Time frame for supply decisions Efficiency and Equity (Ch5) Markets are one way of allocating goods Do they do a good job? A. Efficiency (do the goods go to those that value them the most? ) B. Fairness Ex. X pins… how should we allocate them? 1. Contest: 5 highest grades Ex sports, performance bonuses Pros: •May encourage effort Cons: •Goods may not go to those people that value them the most 2.
First come, first serve: first 5 people to show up get them Ex: walk in clinics Pro: •People who value the good highly will line up early Con: •May get allocated to those with a low opportunity cost of their time 3. Command System: I decide who gets them Ex: how tasks get allocated inside a firm Pro: •May work well when tasks/people are familiar and authority well defined Con: • I can’t tell who values the good the most 4. Lottery: draw names from a hat. Ex. Dorm rooms Pros: •Fair…everyone gets an equal shot Cons: •No reason to expect that high value people will get the good 5. Majority rule vote
Ex, voting politicians Pro: everyone gets an equal say Con: special interest group 6. Personal characteristics If you have a brown belt Ex. Relationships Pros: may work if characteristic highly related to value people have for the good Cons: discrimination 7. Force: everybody fights Ex organized crime/war Cons: strongest might not value the highest Pros: Force can work well in the background oCourts can forcibly reallocate goods 8. Market Mechanism oWhoever is willing to pay the price gets the good Pros: people who have high values are willing to pay more and are more likely to get it
Cons: people might not have enough money Tuesday October 18, 2011 Midterm #2 November 3 (Ch 4,5,6) •Demand and supply •Elasticity (ch 4) •Efficiency and equity (ch 5) Obstacles to efficiency •Price and quantity regulations (gov’t actions) •Taxes and subsidies (gov’t actions) Externalities: your actions impose costs or benefits on others Ex. Smoking. A person might take into account only their own personal benefits and costs but ignore social costs. (second and smoke) OR. Pollution. Firm doesn’t account for external social cost that its production creates. Public Goods A.
Consumption by one person doesn’t “use up” the good. B. Anyone can consume the good without paying Ex: lighthouse: people want to use these goods without paying. “freeriding”. These are usually under provided Monopoly: a single firm sets the market price •Price is higher, quantity is lower Fairness 1. Utilitarianism, (Jeremy bentham, John Stuart mill) •“The Greatest Happiness for the greatest number” •people are roughly the same •the marginal value of money is lower when you have more of it •Redistribute wealth to achieve equality (tax rich, subsidize poor) Problems: A) taxing income: less income generation (work)
B) taxing capital: less capital produced (slower growth) C) costs in administering taxes (more fair but size of the “pie shrinks) 2. Rawls: theory of Justice •Fairness of society judged by the well being of the person who is poorest •(Equal shares of a small pie) may be worse than (unequal shares of a larger pie) 3. Fairness in Rules, not outcomes •Emphasis on equality of opportunity Robert Nozick A. Strong private property rights B. Private property should only be transferred through voluntary exchange Problems: A. No room for redistribution after the fact B. No taxes or government since these aren’t voluntary
Government Actions in Markets (Ch 6) Price ceiling: gov’t regulations that makes it illegal to charge a price higher than some specified level •Set above equilibrium price= no effect •Set below equilibrium price= Example in notebook Black market •Illegal market in which price is higher than price ceiling •Graph in notebook • Thursday October 27, 2011 20 m/c few short answer midterm review: •Note on demand on supply equations (end of ch 3) •Elasticity (Ch 4) know how to calculate and know what it is •Efficiency and equity (Ch 5) *consmer and producer surplus •Government actions in markets (Ch 6) Price ceilings oPrice flooring oTaxes Price Floors: Mandatory minimum price Ex. Minimum wage Graph in notebook •Unemployment increases search costs •More power to firms in hiring decisions •Black markets oEx. Illegal labour markets where people are paid below the min wage oIn notebook Taxes: When the government taxes a good the price paid by consumers and the price received by producers are now different Ex. Gov’t puts a $5 (per unit) tax on producers In notebook Tuesday November 1, 2011 Midterm Thursday Material: 1. Note on demand and supply equations. (end of Ch 3) 2. Elasticity (Ch4) •Price elasticity Elasticity and total revenue (figure 4. 5 in text) •Cross elasticity and income elasticity •Supply elasticity 3. Efficiency and equity (Ch 5) •Alternative allocation methods •Consumer and producer surplus •Efficiency of equilibrium •“fairness” 4. Government Actions (Ch 6) •Price ceilings •Price floors •Taxes Tuesday November 14, 2011 Global Markets Many of the goods and services you consume aren’t produced in Canada Ex. Iphones (all over), clothes (china), tech support (india) •Part of the globalization process oImports: goods we buy from other countries oExports: goods we sell to other countries
Global Imports: Exports in 2008 =$35 trillion Canada: •exports: $535 billion. Agriculture, forestry, energy, mining, machinery, automotive, aircraft •Imports: $503 billion In binder example Tariffs: a tax imposed by the importing country on goods that come from another country Arguments for protection 1. Infant industry Argument •We need to protect domestic industries when they start so that they can mature enough to compete on world markets. •Develop comparative advantage •Everyone can argue this 2. Barriers to trade to protect jobs. •Trade costs jobs •There isn’t a “fixed number of jobs” •Trade also creates jobs